How Customer Value Can Improve Your Price

If you create the value that the Customer is looking for, and if he
perceives that you are creating value, what does he do? Does he choose your
product first (show a preference for it) or be prepared to give you a
higher price? How does it impact pricing and commoditisation?

His perception that you are creating value means he thinks you are creating
a better benefits/cost ratio than competitive offers. That means he is
willing to consider your product/service over competitions’. Depending on
the Value you are creating, he may be willing to pay a higher price.

Let’s look at what he may be willing to pay.

We start again with the Value Map that was discussed in a previous post. The
Value Map plots all competition and our company on a graph of the
customer’s perception on the overall cost vs the benefits. We draw a fair
value line, and then compare ourselves to
competition. Those companies falling below the fair value line are adding
value to customers and those above the line are depleting value.

Let us assume we are company AA. In this example, the product is a
commodity. You can see we are adding value, as we fall below the fair value
line. So we can increase price to reduce the value, or reduce the benefits
to decrease the value. Let’s decide to increase the price to reduce the
value we are giving away.

How do you know how much to add to the price to the product? There are many
ways. I will show you a simple way. Let us tabulate the price versus the
benefit as shown in the table below (I have taken actual prices):

You can calculate the fair value price for DD. Notice here we are looking
at ratings in the graph. We could have plotted actual price also. (BB is missing in the graph. We did not plot it as we did not have enough
data on it.)

You can see we are plotting the price for each of the competitors and their
benefit as we found from the CVA study. The average of all the different
prices is 27.25, and the average of the benefits is 3.90.

Thus an average product in this category will demand a price of 27.25. Our
product gives a benefit of 3.98 and so deserves a price of 3.98 divided by
3.90 and multiplied by 27.25 giving us a price of 27.81, which is an
improvement of 3.4% over AA’s current price.

Remember that in this you are in an almost commodity market, and a 3.4%
improvement in price could improve your profits depending on your variable
and fixed costs to almost 40 to 50%. Not bad! (How did I reach this
conclusion?) Typically a 1% increase in price means a profit increase of
10-15%. Did you know this?

Let’s say your sales price is 100, your fixed costs are 25 and your
variable cost is 67. Then your profit is 8. Now we increase price by 1%
from 100 to 101. Our profit goes up from 8 to 9 or we increase the profit
by1/8 or 12.5%)

In the real world, you might wish to increase your price by 1 to 1.5%
initially, while working on improving benefits further.

Also look at AA members, with benefits of 4.10. You can figure out a fair
price to charge them.In a non-commodity market, you might be able to get higher prices.

We can actually break down benefits into its attributes, and conduct this
exercise for each benefit attribute and price that attribute based on the
relative importance of the attribute and also the ratings from the
Customers.

Pricing based on sub-attributes of Benefits

We can get even more granular. We know that benefits have sub attributes.
Let’s assume these are the product, the service, and the image. I am noting
down hypothetical importance or weights:

Product 20%

Service 45%

Image 35%

Then we can say for the average product in the example given in the
previous section, the service has 45% of a bearing on the price. So the
average price of 27.25 is made up the importance of the product, the
service and the image.

De-commoditisation

You will note that I said the example showed above happened to be in a
commodity market — it is actually for a fertiliser. Even though the
competitors keep on focusing on the quality of the fertiliser, the farmer
knows there is no difference in the product. If this is the case and the
fertiliser is a true commodity, farmers would buy on price. However, it
turns out that the farmers prefer specific companies and their fertilisers.

It turns out that such companies have a reach out program, membership
programs and contact processes that align the customer to the company.
Hence, even though there might be a slight price differential, they prefer
to buy the company they have an association with and trust.
Such a reach out program de-commoditises the fertiliser. You can see the
relative importance of the image of the product.

And which attributes to work on to increase value and potential price.

Discussion

Total Customer Value Management helps all departments and executives to
have a Customer focus. It is the foundation of building a Customer culture.
Customer strategy and Customer Centric Circles are building blocks of the
Customer culture and a Customer mind-set. This gives the company a great
competitive advantage. Do you find your executives talking about how to
improve Customer Value? Have you attended such meetings?

You can see from this article that price depends on the benefits you
create. If you create lower benefits, you will command a lower price and
vice versa. Each part of your benefits has a price associated with it based
on the relative importance of that benefit. Thus price is dependent on the
value you create.

Moreover, you can decommoditise products by adding value such as a brand,
image, association of the product with the customer, service etc.

Do it yourself

See if you can create a Value Map for your product, and see where you stand
versus competition.

Figure out the price for the benefits you create.

How much does 1% increase of price mean for your company in profit
increase?

Think of value creating ideas that can de-commoditise or add more value to
your customers. Try to put them into a priority based on the importance the
customer gives to these items

Gautam Mahajan, President of Customer Value Foundation is the leading global leader in Customer Value Management. Mr Mahajan worked for a Fortune 50 company in the USA for 17 years and had hand-on experience in consulting, training of leaders, professionals, managers and CEOs from numerous MNCs and local conglomerates like Tata, Birla and Godrej groups. He is also the author of widely acclaimed books "Customer Value Investment: Formula for Sustained Business Success" and "Total Customer Value Management: Transforming Business Thinking." He is Founder Editor of the Journal of Creating Value (jcv.sagepub.com) and runs the global conference on Creating Value (https://goo.gl/4f56PX).

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